Rand traders have a rule of thumb that when something is going well for SA it will surely find a way to shoot itself in the foot. This is actually a surprisingly good way of explaining why real rates in SA remain so high and the yield curve so steep, stymying growth and investment.
The recent dramatic “revelations” about alleged police and security structure corruption, intermeshing with the political economy, should have shocked no-one. Yet what perhaps is missing is an understanding that the backdrop of crime and corruption have such a negative impact on investment, growth and job creation.
While network industry structural reform has taken centre stage and advanced business and investor sentiment hasn’t improved — precisely because there are wider binding constraints to it — the backdrop is of party politically intertwined rent extraction and the destruction of accountability to sustain it.
One of my biggest fears is that everything goes “right” with structural reform and still growth does not meaningfully lift off. This feels like a somewhat irrational fear but also speaks to the wider range of issues beyond network industries that we have to get right and are not.
Crime and corruption is one area, but also industrial policy that has perhaps been stabilised but at a deeply inconducive pace and remains an inhibitor of growth, not to mention that education and healthcare are in urgent need of the right reforms.
We should caution against the normalisation of certain bad things. Bad education provision and bad public healthcare have become norms, just as crime and corruption have, and so we can miss the impact on domestic investors as much as foreign investors.
The cost of doing business rises as people have to mitigate against a system that is antithetical to growth, whether that is protection payments, deadweight loss payments to local “business associations” or additional security provisions, while in parallel the real and perceived risks of doing business shift decision-making.
The lack of true accountability from prior security failures or the numerous commissions set up since 2018 also add to a sense of hopelessness, even as the courts are seen to remain independent and fair. The focus instead falls on the problems of the National Prosecuting Authority (NPA) and other actors in the accountability value chain. It has indeed been notable how much patience was given to the NPA for the first five years by corporate leaders and investors, but has now run out.
Combined still with a sense of limited options on the political front and declining turnout last year, this is a dangerous mix, as much as lower growth and higher unemployment is a dangerous mix.
Still, through this period markets have kept concerns a little more under wraps than usual with (exaggerated) expectations about an early inflation target change (before the minister’s “genuine consensus” has been reached) and with more positive fiscal news — and SA appearing no worse in the difficult global backdrop and US shock-prone volatility of global markets.
It would be a mistake to misconstrue lower nominal rates that come from lower inflation, with what really matters in the medium run, which is lower real rates that come from lower risk premiums.
It is a national pastime to say that the president should act quicker, and such calls have merit in themselves. Yet the point is that greater decisiveness on all matters, including other corrupt ministers not just on the Mkhwanazi matters, would be an important signal to markets and to the pricing of risk as much as anything else.
The impact of crime and corruption is far harder to measure on growth and investment than logistics that don’t work or electricity that doesn’t come out of a plug. Yet, it comes up in every conversation with foreign direct investors, and is a regular thread about portfolio investment discussions and decision-making.
We perhaps need to think about the “doing business” environment more widely and deeply, and act on it with some urgency. The security cluster in cabinet has always had a strange wall between it and the economic cluster.
The issues about the Financial Act Task Force and the fact that SA fell onto its greylist in the beginning spoke to the inability of different cabinet clusters to work together. Those walls are now becoming a little more porous, but there is a long way to go and more speed is clearly needed.
Ultimately we must consider everything — including real rates, investment decisions, jobs, growth, tax and sentiment — as interconnected and driven by many factors, including complex ones such as crime and corruption.
That the president has been unable to drive a growth agenda into the wider public sector and with it force everyone to understand their role in promoting growth — particularly into the security cluster — is perhaps the deep underlying problem here and needs to change faster than has been seen to date.
Otherwise there will be many economic reforms and we will still be wondering why unemployment is climbing and growth is stuck at 1%.
• Peter Attard Montalto leads on political economy, markets and the just energy transition at Krutham, a SA research-led consulting company.
This article first appeared in Business Day.
